Oil Prices Surge on Reports of a Big Output Cut by OPEC

Oil prices jumped more than 8% on Wednesday to a five-week high as newswires reported that the Organization of the Petroleum Exporting Countries had agreed its first oil output cuts since 2008.

An OPEC source told Reuters on Wednesday that the cartel, which produces one-third of the world’s oil, had firmed up an agreement in line with a tentative deal reached in Algiers in September. That would involve cutting output from a current level of around 33.6 million barrels a day to somewhere between 32.5 million and 33 million.

Bloomberg said the new ceiling would be at the lower end of that range, an effective cut of between 1.1 million and 1.2 million barrels a day from current levels.

Brent crude futures for delivery in January were up $4 a barrel, or 8.5%, at $51.32 a barrel by 0915 ET, recovering from a drop of nearly 4% on Tuesday and on course for their biggest one-day move in nine months. U.S. West Texas Intermediate (WTI) crude futures were $3.63 higher at $48.86 a barrel, a one-week high.

The volatility is acute because world markets are still badly oversupplied, and prices have edged up since September almost exclusively on the hope that OPEC would rein in output and end the price war that began in late 2014. Analysts at Goldman Sachs, Barclays, and ANZ had said oil prices would quickly fall to the low $40s a barrel if OPEC failed to cut output.

However, if the cut sticks, then the International Energy Agency reckons that the world market could “move from surplus to deficit very quickly in 2017”, leading prices to rise sharply once the existing stock overhang is depleted.

Traditionally, OPEC attaches great fanfare to its deals, keen to stress its unity and discipline. However, the same tradition also dictates that there is a great deal of devil in the details, and that some countries will invariably produce above their agreed ceiling in pursuit of a free ride. One crucial detail is the role of non-OPEC producers such as Russia. Bloomberg said the agreement foresaw a cut of 600,000 barrels a day by non-OPEC producers. However, Russia–the world’s largest producer–hasn’t said confirmed it will cut output at all, and OPEC has no way of forcing it to.

The first sign that the cut might not be quite as big as promised came as Reuters reported a source saying that Indonesia had been suspended from the cartel, and its production quota redistributed among other members. This arithmetical sleight-of-hand (Indonesia will continue to produce about 750,000 barrels a day, it just won’t be included in the OPEC figures), suggests that the effective cut in world oil supply could be much smaller than the one proclaimed.

OPEC ministers started their meeting at 0400 ET on Wednesday at its Vienna headquarters. A press conference is tentatively expected around 1000, Eastern time.

Oil prices jumped more than 8% on Wednesday to a five-week high as newswires reported that the Organization of the Petroleum Exporting Countries had agreed its first oil output cuts since 2008.

An OPEC source told Reuters on Wednesday that the cartel, which produces one-third of the world’s oil, had firmed up an agreement in line with a tentative deal reached in Algiers in September. That would involve cutting output from a current level of around 33.6 million barrels a day to somewhere between 32.5 million and 33 million.

Bloomberg said the new ceiling would be at the lower end of that range, an effective cut of between 1.1 million and 1.2 million barrels a day from current levels.

Brent crude futures for delivery in January were up $4 a barrel, or 8.5%, at $51.32 a barrel by 0915 ET, recovering from a drop of nearly 4% on Tuesday and on course for their biggest one-day move in nine months. U.S. West Texas Intermediate (WTI) crude futures were $3.63 higher at $48.86 a barrel, a one-week high.

The volatility is acute because world markets are still badly oversupplied, and prices have edged up since September almost exclusively on the hope that OPEC would rein in output and end the price war that began in late 2014. Analysts at Goldman Sachs, Barclays, and ANZ had said oil prices would quickly fall to the low $40s a barrel if OPEC failed to cut output.

However, if the cut sticks, then the International Energy Agency reckons that the world market could “move from surplus to deficit very quickly in 2017”, leading prices to rise sharply once the existing stock overhang is depleted.

Traditionally, OPEC attaches great fanfare to its deals, keen to stress its unity and discipline. However, the same tradition also dictates that there is a great deal of devil in the details, and that some countries will invariably produce above their agreed ceiling in pursuit of a free ride. One crucial detail is the role of non-OPEC producers such as Russia. Bloomberg said the agreement foresaw a cut of 600,000 barrels a day by non-OPEC producers. However, Russia–the world’s largest producer–hasn’t said confirmed it will cut output at all, and OPEC has no way of forcing it to.

The first sign that the cut might not be quite as big as promised came as Reuters reported a source saying that Indonesia had been suspended from the cartel, and its production quota redistributed among other members. This arithmetical sleight-of-hand (Indonesia will continue to produce about 750,000 barrels a day, it just won’t be included in the OPEC figures), suggests that the effective cut in world oil supply could be much smaller than the one proclaimed.

OPEC ministers started their meeting at 0400 ET on Wednesday at its Vienna headquarters. A press conference is tentatively expected around 1000, Eastern time.